Business

US consumer spending slipped in April, but economic rebound still on track

The Canadian Press -
May 30, 2014 / 10:42 am | Story:
116202

Photo: The Canadian Press. All rights reserved.

FILE - In this Friday, Nov. 23, 2012 file photo, a cashier rings up a cash sale at a Sears store, in Las Vegas. The Commerce Department reports how much consumers spent and earned in April, and The University of Michigan issues its index of consumer sentiment for May, on Friday, May 30, 2014. (AP Photo/Julie Jacobson, File)

WASHINGTON - U.S. consumers cut back on spending in April for the first time in a year, taking an unexpected pause after a big jump during the previous month. The results, however, are unlikely to derail an expected spring rebound in the economy.

Consumer spending, which accounts for 70 per cent of overall economic activity, fell 0.1 per cent in April, the Commerce Department said Friday. The drop was the first in 12 months. But it followed a 1 per cent surge in spending in March, which marked the biggest increase in more than four years.

"It is obvious that after an unseasonably colder January and February consumers came out with a vengeance in March," Chris Christopher, an economist at IHS Global Insight, said in a note to clients. "So, April's poor showing on the spending front is payback for a strong March."

The latest figure reflects reductions in durable goods purchases such as autos and in services such as heating bills. While disappointed, analysts say the results don't change the broader upward trajectory of the economy and predict consumer demand to bounce back in May.

An "improving job market should support stronger spending in coming months," Jennifer Lee, senior economist at BMO Capital Markets, wrote in a research note.

Friday's government report also showed that income rose 0.3 per cent in April after advancing 0.5 per cent in March. That marks the fourth consecutive monthly climb. The economy has been generating jobs at a solid pace in recent months, including a gain of 288,000 jobs in April, the strongest uptick in hiring in two years.

With spending down and Americans were earning more, the saving rate rose in April to 4 per cent of after-tax income, up from a saving rate of 3.6 per cent in March.

Inflation, as measured by a gauge tied to spending, showed prices rising 1.6 per cent from a year ago, up from a 1.1 per cent year-over-year price gain in March. However, even with the increase, inflation remains below the Federal Reserve's 2 per cent target.

In April, consumers reduced spending on durable goods such as autos by 0.5 per cent. The drop followed a big 3.6 per cent jump in durable good spending in March. Consumers boosted spending on nondurable goods a slight 0.1 per cent while trimming spending on services by 0.1 per cent. Spending on services, which includes utility bills, had been rising rapidly during the winter, reflecting higher heating costs due to the severe cold in many parts of the country.

Consumer spending remained strong through the first quarter, rising at an annual rate of 3.1 per cent. But much of that strength came from increased health care spending, reflecting new enrollments through the Affordable Care Act.

Friday's data follows news the previous day that the overall economy shrank 1 per cent in the January-March quarter. It was the first contraction in three years and was blamed on a number of special factors including an unusually harsh winter.

Economists estimate that further gains in hiring will boost consumer confidence and spending in the coming months, driving overall economic growth as measured by the gross domestic product. Some analysts say GDP growth could hit an annual rate of 4 per cent in the second quarter and top 3 per cent in the second half of this year.